There is a buzz around investing in Bitcoin and other cryptocurrencies. The tales of fortunes made on the back of rapid price rises in these digital currencies are undoubtedly tempting to an investor looking to get rich. But the volatility that produces those rapid price increases cuts both ways – it is just as easy to lose your shirt investing in Bitcoin.
Before cryptocurrencies, the Forex markets were where fortunes allegedly were made. In reality, up to 95% of traders lost money frequently speculating on short-term moves in exchange rates. Of course, an investor could buy and hold Bitcoin forever, to overcome short-termism. However, Bitcoin is still a volatile asset whose value lies in its competitiveness as an alternative medium of exchange.
I think stocks and shares investing beats backing Bitcoin. ISAs can provide a tax-free wrapper around stock investments which is a huge advantage. Diversifying a portfolio and lowering its risk is possible with stock funds, or by picking multiple stocks. The idea behind diversification is to spread the risk across companies that do different things. The value of a stock can be judged by looking at its price-to-earnings (P/E) ratio or its dividend yield. Furthermore, the anticipated performance of a company over time can guide the valuation of its stock price.
Stocks also have different characteristics that can make them suitable for different types of investors. An investor who has retired and needs income may look at FTSE 100 dividend-paying stocks. A younger investor building their retirement pot may look at growth stocks in rapidly growing companies, perhaps trading at high P/E ratios. Or maybe they prefer to look at value stocks that look cheap based on their P/E ratios, but expect the market to recognise this in the future and raise the price.
There is also the option of investing in funds that seek out growth, value, or income stocks on behalf of investors who do not wish to pick stocks for themselves. Furthermore, an investor does not have to limit themselves to one style of investing. Portfolios can be built from growth, value, and income stocks.
Now might not be considered the best time to invest in the stock market after it crashed. I am going to suggest it is as good a time as any. Right now, stocks are relatively cheap, which means any money invested buys more shares. However, I would caution against trying to time the market. Regularly dripping money into investments when the markets are up or down over a long time horizon has a good track record of building wealth.
I think it is tough to make a fortune overnight by investing in a volatile asset like Bitcoin. However, with patience and a Stocks and Shares ISA, regularly investing in an appropriate basket of stocks and shares can build wealth over time.
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James J. McCombie has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.